Net rate of return on capital employed for UK private non-financial corporations related to their UK operations for January to March 2014. The net rate of return is a common way of measuring the profitability or economic success of a company or sector. It is calculated by expressing the economic gain or profit as a percentage of the capital used to produce it. See paragraph 2 of the Background Notes for a more comprehensive definition.
The estimates in this statistical bulletin are consistent with the Quarterly National Accounts Q1 2014, published on Friday 27 June 2014, as described in the ‘revisions’ section.
The net rate of return of all private non-financial corporations in Q1 2014 was estimated at 11.9%. This compares with the revised estimate of 12.1% in the previous quarter for Q4 2013.
As Figure 1 shows, the net rate of return for private non-financial corporations remained at the higher end of the range experienced during the last five years, but lower than the rates experienced in 2008.
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The latest estimate of real gross domestic product confirmed the UK economy grew by 0.8% in the first quarter of 2014. The net rate of return for UK companies, which includes all sectors apart from financial services, decreased by 0.2 percentage points to 11.9%. The gross operating surplus including the alignment adjustment - or company profits - of UK private non-financial corporations in the first quarter of 2014 increased by 3.9% in current price terms. This suggests that profits increased at a slower rate than capital employed for the first time since Q1 2013.
Within this broader picture, the net rate of return for manufacturing companies decreased to 9.3% in Q1 2014, down from 11.8% in the previous quarter which was the highest rate since the 2008 downturn. The net rate of return for continental shelf companies, which includes those involved in oil and gas extraction activities, continued to fall and at 27.6% was the lowest rate since Q2 2009. Activity in the oil and gas extraction sector increased by 0.8% in Q1, however the industry has been in long term decline, contracting in every year since 2002.
The overall business environment was still weak but has been improving since mid 2013. Business investment grew by 10.6% in Q1 2014 compared to Q1 2013 however it still remains some way below (15.5%) the 2008 peak. After the FTSE100 surged at the beginning of 2013, breaking the 6,000 mark last recorded in mid-2011, it continued to rise albeit at a slower rate and is now around the 6,700 mark in Q1 2014. In addition, Ernst & Young reported that UK quoted companies (Main Market and AIM listed companies) issued 74 profit warnings in Q1 2014, 1 more warning than Q4 2013 and 2 more than the previous year.
The estimated net rate of return for manufacturing companies in Q1 2014 was 9.3%. This was the lowest rate seen since Q2 2013.
As Figure 2 highlights, the estimates of net rate of return for the manufacturing sector can be quite volatile. Variation from one quarter to the next usually reflects the fortunes of a number of the larger companies and is not necessarily an indicator of improving or worsening economic performance across the sector as a whole.
The estimated net rate of return for service companies in Q1 2014 was 15.0%.
As Figure 2 shows, the net rate of return was within the range experienced during the last five years, but lower than the levels experienced in 2008.
Non-UKCS companies comprise manufacturing, service and other non-UKCS companies (such as construction and power supply).
The estimated net rate of return for non-UKCS companies in Q1 2014 was 11.3%, at the higher end of the range seen in the last five years.
As Figure 3 shows, the net rate of return of non-UKCS companies was very similar to the picture for all private non-financial corporations (as seen in Figure 1), with a stronger picture in the last few years, but below the levels experienced in 2008.
UKCS companies are defined as those involved in the exploration for, and extraction of, oil and natural gas in the UK. Due to the nature of the capital assets employed, net rates of return for continental shelf companies are not directly comparable with those for other industries.
The estimated net rate of return for UKCS companies in Q1 2014 was 27.6%, the lowest recorded estimate since Q2 2009.
The rates of return for this industry broadly follow movements in oil and gas prices. As Figure 4 shows, the net rate of return for UKCS companies can be very volatile.
Profitability is a relative measure of profit and what created it. This bulletin shows the rate of return on capital employed. More detail on the calculation of rates of return is available in the ‘Background notes’ to this bulletin. However, other countries use a range of measures, making comparisons difficult.
Eurostat show comparisons, across the European Union, of the profit share of non-financial corporations defined as gross operating surplus (GOS) divided by gross value added (GVA).
GVA is the difference between the cost of inputs (whether capital or labour) and the cost of the output. The difference in the cost is due to the value added by the use of labour and capital.
GOS is the income earned from capital.
The profit share of private non-financial corporations (PNFCs) shows the percentage of GVA that is distributed to the owners of capital. The majority of this payment would be kept as cash reserves, or used for dividend payments or investment. The majority of compensation of employees, the remainder of GVA, is distributed to workers as wages and salaries.
The profit share for PNFCs in 2011 was 32.8%, this was 0.4 percentage points higher than the previous year and 5.7 percentage points lower than 1997 (figure 5). A higher profit share alongside rising GVA suggests that the situation is improving for businesses at a faster rate than labour.
International data are only available at the Non-financial corporation (NFC) level, and therefore includes both Private and Public corporations (figure 6).
When all Non-financial corporations are included, the profit share was 20.9% in the UK in 2011, up from 20.4% in 2010. The UK has the lowest profit share amongst the selected countries that have available data.
Capital Stocks and Capital Consumption data
Annual Capital Stocks and Capital Consumption data on a SIC 2007 basis were published on 2 July 2014. At the time of the last bulletin it was anticipated that both annual and quarterly estimates would be available for inclusion in this bulletin. However, as quarterly estimates have been delayed to allow for further quality assurance, the revised annual estimates have not been incorporated into this bulletin. Capital Stocks and Capital consumption on a SIC 2007 and ESA10 basis are now expected to be incorporated into the next Profitability release. Further details on the methodological changes to Capital Stocks and Capital Consumption are available in the impact of the methodological changes to the estimation of capital stocks and consumption of fixed capital release and annual data are available in the Capital Stock, Capital Consumption - Capital stocks and consumption of fixed capital, 2013 release.
Revisions to the net rates of return for PNFCs have been made back to Q1 2013, in line with the UK National Accounts revisions policy. These incorporate revisions arising from the production of the Quarterly National Accounts Q1 2014.
Understanding the data
Interpreting the data
Private non-financial corporations (PNFCs) are comprised of UK Continental Shelf (UKCS), manufacturing, non-financial service sector companies and others (including construction, electricity and gas supply, agriculture, mining and quarrying). UKCS companies are defined as those involved in the exploration for, and extraction of, oil and natural gas in the UK.
The rates of return presented are ratios of operating surpluses compared to capital employed, expressed as percentages. The ratios measure the ‘accounting’ rates of return achieved in a particular period against total capital employed. The rates of return are on the basis of current replacement cost and relate to UK operations of PNFCs. The net rate of return uses capital estimates which are net of capital consumption, and is more widely used than the gross rate of return. Rates of return are published for quarters and for years.
The main components of the operating surpluses data used in the compilation of the rates of return are the profits data from the Quarterly Operating Profits Survey (160.1 Kb Pdf) (QOPS) and provisional HMRC company profits data.
The underlying capital data used to calculate these rates of return are based upon data for capital stocks and capital consumption, which has been provisionally compiled on a SIC 2007 basis. These data are subject to revision when the SIC 2007 data are finalised. The expectation is that these data will be incorporated into the Q2 2014 Profitability bulletin to be published in October.
Definitions and explanations
The gross operating surplus of PNFCs consists of gross trading profits, plus income from rental of buildings, less inventory holding gains.
Gross trading profits include only that part of a company's income arising from trading activities in the UK. It does not include income from investments or other means, such as earnings from abroad. Gross trading profits are calculated before payments of dividends, interest and tax. The gross trading profits figures used in the calculation of gross operating surplus exclude the quarterly alignment adjustments applied to non-UKCS companies’ gross trading profits, as published in the Quarterly National Accounts.
Inventory holding gains are the differences in the change in the book value of inventories measured at replacement cost and historic cost. The holding gain is subtracted from profits because revaluations are not considered to be part of economic activity, as defined for National Accounts purposes.
Estimates of gross capital stock are a measure of the cost of replacing all produced capital assets held at a particular point in time. Capital employed is the value of fixed assets, plus the value of inventories. It measures the value at replacement cost of all fixed assets at the end of a calendar year. This includes all tangible assets and intangible assets which have been produced and are themselves repeatedly or continuously used in the processes of production for more than a year. Tangible assets include buildings, plant and machinery. Intangible assets include computer software and mineral exploration costs. For UKCS companies, capital employed includes mineral exploration costs and oil rigs, but not the oil and gas reserves that are classified as non-produced assets. Inventories include raw material and fuel that are used up in production. Book values are used for levels of inventories.
In the calculations for net rates of return, estimates of net operating surplus are net of capital consumption (depreciation). Capital consumption is derived from capital stock and covers the depreciation of fixed assets over their service lives. Estimates of net capital are net of accumulated capital consumption; that is, they are a measure of the written down replacement costs of fixed assets.
Use of the data
The underlying profits data used to calculate the rates of return are used within the UK National Accounts. They are consistent with the Quarterly National Accounts Q1 2014 and the UK Economic Accounts Q1 2014, both published on 27 June 2014.
Details on the methods used for the Quarterly Operating Profits survey are available in the Quality Methodology Information (160.1 Kb Pdf) document.
Perpetual inventory method
Underlying estimates of capital stock and capital consumption are produced using the Perpetual Inventory Method. Further details are available in the ‘Capital Stocks, Consumption of Fixed Capital 2013’ publication, which was published on 2 July 2014.
The net rate of return is defined as the ratio of the operating surplus compared to the capital employed, expressed as a percentage. The accuracy of the data in the numerator is likely to be high because the main component (profits) is benchmarked every six months to definitive, comprehensive, HMRC data. The accuracy of the data in the denominator is likely to be less high given that the capital stocks and capital consumption data remain on a provisional SIC 2007 basis.
The Quality Methodology Information (118.8 Kb Pdf) report for Profitability is available on the Office for National Statistics website.
The standard error of a series is a measure of the spread of possible estimates that might be obtained when taking a range of different samples of the same size. This provides a means of assessing the accuracy of the estimate: the lower the standard error, the more confident one can be that the estimate is close to the true value. Standard errors for quarterly profits, a key component of the numerator in the profitability data, are currently being developed and will be published in this Bulletin later this year.
Table R1 accompanying this bulletin shows the revisions to the net rates of return made back to Q1 2013. These revisions are consistent with the data published in the latest Quarterly National Accounts Q1 2014 statistical bulletin on 27 June 2014.
Estimates for the most recent quarters are provisional and, as usual, are subject to revisions in the light of updated source information consistent with the
National Accounts revisions policy (41.6 Kb Pdf)
. ONS has a web page dedicated to revisions to economic statistics which brings together ONS work on revisions analysis, links to relevant articles, revisions policies and key documentation from the Statistics Commission's report on revisions.
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Next publication: 8 October 2014
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